Did the EPA Cross the Line this Time?

Murray Energy has given the legally required 60 day notice to the Environment Protection Agency (EPA) that it intends to sue over the agency's rules and implementation of rules as they relate to coal. This is an important fight that you need to watch because it could have big implications for the entire coal industry.

LeapfrogAlthough Murray Energy is a private company, it made big news last year when it agreed to buy five coal mines from CONSOL Energy (NYSE: CNX) for around $3.5 billion. CONSOL has been shifting more and more toward natural gas drilling in recent years, and the sale of these relatively expensive-to-operate mines marked a major transition for the company. At one point it was a coal miner with natural gas assets, but now it's a natural gas driller with some well-positioned coal assets.

So the deal made strategic sense for CONSOL, but what did Murray get? Although expenses at the mines were higher than at the mines CONSOL chose to keep, the new assets vaulted Murray into the number five spot in the coal market. That's a bold move in a struggling industry, particularly since CONSOL Energy, a coal company since the days of Lincoln, was clearly looking to reduce its coal exposure.

Now, after doubling down on coal, Murray is putting itself in the headlines again by threatening to sue the EPA over what the company describes as a five year "war on coal."

Is there a fight to be had?Murray is claiming that the EPA has failed to consider the employment impact of its rules as they relate to the coal industry, which appears to be mandated by the Clean Air Act. As evidence that an employment review hasn't been undertaken, Murray quotes EPA Administrator Gina McCarthy at her confirmation hearing stating that the EPA doesn't interpret the Clean Air Act as requiring such considerations.

Although it looks like it will be up to the courts to decide whether or not Murray has a leg to stand on, questions about the EPA's treatment of coal aren't new. For example, when the EPA released proposed limits on carbon dioxide emissions Peabody Energy (NYSE: BTU) made its position quite clear: "Peabody believes the EPA's plan is outside the realm of the law."

In this instance, the issue revolves around the availability of carbon capture technology. The EPA can regulate carbon dioxide, but in its own words it must set rules based on the "best system of emission reduction ... adequately demonstrated." The factors it must consider are "feasibility, costs, size of emission reductions and technology."

From Peabody's standpoint, "Carbon capture and storage technology is simply not commercially available..." Arch Coal (NYSE: ACI) made a similar statement in its response to the proposed rules: "We believe that coal plants with near-zero greenhouse gas emissions will be achievable in time, but such technology is simply not available today..."

The interesting thing is that one of the key pieces of evidence the EPA presents to support carbon capture is Southern Company's (NYSE: SO) Kemper plant—a project that isn't complete and is billions of dollars over budget. Once again, the judiciary will likely get involved in figuring this one out, but Arch and Peabody obviously don't see what the EPA is seeing.

However, it's telling that during the fourth quarter conference call Southern CEO Thomas Fanning said, "I met with Gina McCarthy and her whole staff along with some other CEOs in the industry, and I told this to her, I said it on TV. The characteristics of Kemper County are such that they are reasonably unique to that site..." That sounds like Southern doesn't see Kemper as supporting evidence for the EPA's carbon dioxide rules.

Not over yetThe pending lawsuit from Murray Energy adds to the list of legal issues that will have to be dealt with relating to the so-called "war on coal." Clearly Murray, Arch, CONSOL, and Peabody have vested interests in the outcome, as does Southern in a different way. Although such legal wrangling may stretch out for years, if you have money on the line, you have a vested interest in this fight, too. You need to keep tabs on what's going on.

Government regulation isn't only affecting the coal industry

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